America is behind in the race for green energy. With the economy in the dump, many have said that a major component to fixing the economic problem is through expanding the green energy movement. Some even argue that “the true engine of economic growth is green energy.”

Last year, Solyndra, a manufacturer of solar energy systems, was called “The Next Big Thing” by the Wall Street Journal. Its innovative process had become a golden child in the green energy movement. It looked as if Solyndra would prove to the naysayers that there was a growing market for clean energy. Unfortunately, in September the company filed for Chapter 11 Bankruptcy, leading to a media frenzy on the failure of green energy.

The Solyndra scandal highlights the flaws of the loan guarantee method of incentivizing promising technologies. It is therefore a failure of incentive design – and not of green energy. The loan guarantee program got its start in the Energy Policy Act of 2005 because Congress wanted to incentivize “innovative technologies” like renewables, nuclear power and “clean coal” on the cheap: a loan guarantee features low upfront costs to taxpayers, allowing politicians to issue press releases proclaiming hundreds of millions or billions of dollars in support for a program for a loan that only books a few million on the government’s books. That is, unless the recipient defaults on the loan, in which case taxpayers are on the hook for the full, guaranteed amount.

This puts Department of Energy bureaucrats in the awkward position of acting like well-seasoned private equity firms: evaluating a company’s business model, pouring through the books and making decisions on how to invest half a billion dollars of someone else’s money. Private markets do this all the time, and many smart private equity firms make bad decisions–just as several did with Solyndra.

There’s no question that the Obama Administration made a series of politically-motivated, risky and catastrophic decisions when it came to their continued push to shovel the public’s money to Solyndra . But Republican attacks that it’s an example of cronyism on behalf of democratic party-connected Solyndra investors is an overshoot—at worst, the evidence suggests the Administration rushed the loan guarantee over the dissent of OMB analysts to prioritize the press prospects such an announcement would have to promote the Administration’s “Green Jobs” agenda.

It would be a great disservice to future generations if the lesson we learn from the Solyndra debacle is to back off a commitment to incentivize solar energy. Instead, we must understand that Solyndra failed because the United States has no coherent policy to promote consumer demand for solar power. In Germany, which has 630% more installed solar capacity than America, solar benefits from a demand-side incentive system called afeed-in tariff, which taps into rates (rather than taxes) to provide production incentives for rooftop solar. Spurred by the large demand caused by the tariff, manufacturers’ incentive is feeding the market. In the US, absent any domestic demand, a manufacturer like Solyndra was faced with cutthroat competition from China and Germany and the prospect of having to compete domestically and globally.

But if instead of inserting government subsidies on the capital end of things, we need to adopt a feed-in tariff type model that will trigger the kind of robust demand for rooftop solar panels that US manufacturers could sell to. Sure, we’ll still get beat early on by mature, foreign competitors, but grabbing even a small chunk of rising domestic market share is better making guesses which manufacturers will win. Capturing even small market share today will prime the industry to take bigger shares in the years ahead. This is the key to igniting our Rooftop Revolution.

We’re clearly losing in the green energy race. The sad thing is, many in power don’t see the importance in even joining the race at all. It’s clear that the American public and those in power need some more convincing. Until they open their eyes to the fact that America has been eclipsed as a green-tech leader, the U.S. will continue to fall behind and fail to capitalize on our enormous renewable energy potential. Stories like Solyndra will continue to happen, as long as domestic green energy companies have to struggle to compete with their foreign competition.

[…] As I’ve said before, loan guarantees are an awful way to promote renewables – we are a consumption-based economy, and we need to stimulate renewable energy demand – US manufacturers will follow. […]